Whitman: PSG Too Intertwined In HP's Business To Sell, Spin Off

HP's consideration of its PSG options, which CEO Meg Whitman characterized as an "incredibly rigorous analysis," began after former CEO Leo Apotheker's bombshell Aug. 18 declaration that HP was looking at a possible sale or spin-off of PSG.

HP's analysis involved cross functional teams led by subject matter experts who examined the linkages between PSG and the rest of the HP businesses, including revenue and cost synergies, one-time separation and startup costs, and execution risks, Whitman said in a Thursday conference call held to discuss HP's decision to keep PSG.

"We had 18 different teams, with experts in each area, who dove deep into this," Whitman said on the call. "It was an impressive thing to watch on a pretty accelerated time frame."

Despite the considerable expenditure of corporate brainpower this endeavor likely involved, Whitman said that once the analysis was completed, HP's best course of action was quite clear. "The decision was actually very straightforward," Whitman said. "HP and PSG are better together."

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HP channel partners are generally quite pleased with the company’s decision to retain PSG. Many were horrified by the business implications of Apotheker's original 12-to 18-month window for rendering a decision on PSG, and they're impressed that Whitman was able to get it done just weeks after taking over as CEO.

However, one longtime PSG solution provider couldn't help noting that HP could have avoided the whole mess by conducting its strategic assessment of PSG behind closed doors.

"I'd glad HP did such a thorough analysis on PSG. But couldn't they have done this before announcing they were looking at a sale or spin-off?" said the source, who requested anonymity.

The analysis also showed that PSG is a major factor driving HP's supply chain efficiencies, component pricing, distribution channels and solutions portfolio, and that these synergies amount to more than $1 billion in annual operating profit, CFO Cathie Lesjak said in the call.

"A spin-off would cause us to lose those synergies, and require incremental investment in channel, sales and marketing," she said. "The cost of creating a new worldwide brand would be significant." The combination of PSG and HP's Enterprise Storage Server Networking (ESSN) division also gives HP "significantly supply chain and pricing leverage," according to Lesjak.

In fact, PSG is so intertwined with HP's business that building a new brand would result in about $1.25 billion in one-time startup costs, a figure that includes new systems for IT support and finance, Lesjak said.

Of course, there was already plenty of publicly available data to make the argument against a PSG sale or spin-off, like the fact that PSG has generated $2.3 billion in operating profit over its last four quarters, amounting to a record for the division over a one-year period. The $40.7 billion in revenue that PSG pulled in during fiscal 2010 speaks pretty loudly, too.

Now, ten weeks after Apotheker's bombshell revelation, HP has the cold, hard data to show that the role of PSG in its business is very much like a vital organ, one that, if removed, could have lasting negative impact on the organization as a whole.

"We believe that the one-time up front separation and startup costs are material," Lesjak said on the call. "Right now we have much better ways to allocate our capital to generate higher returns."